Has the absence of an active corporate bond market in Australia limited our economic development? The depth and liquidity of American debt markets has enabled the United States to fund strategic projects and investments since Alexander Hamilton restructured state debt in the 1790s.
A deep and liquid debt market has allowed US pension funds to sensibly invest in corporate America with benefits for both the broader economy and pension fund members.
Australia now has the third largest pool of savings in the world, but if investment managers want to invest in Australian corporate bonds they must go overseas.
Not only is this more expensive for Australian investors and businesses, not only does it reduce competition for capital, remove a form of debt that can meet specific business and investor needs, the lack of an Australian bond market has reduced our nation’s capacity to be a world leader in financial markets.
The question the Tax and Revenue Committee is seeking to understand is why a corporate bond market has not developed in Australia despite having all the necessary ingredients for us to have one. And has the lack of a corporate bond market had a negative impact on our economy.
There will undoubtedly be some that say we have found work arounds in Australia to make up for the lack of a corporate bond market, and others will claim that there is no real problem to be solved here. However, both arguments while legitimate, do not answer the question why a market that has had so much beneficial impact in other countries has failed to develop here in Australia. Further, if Australian businesses and our debt markets have found a work around why do so many businesses still look for corporate debt offshore and the emergence of the private placement market?
Indeed, a general question remains: have all the so-called investor protection regulations actually had the unintended consequence of denying smaller, less well-connected investors, choices in their investments?
The Parliament should also know how a corporate bond market could allow our banking system to become more resilient by providing an avenue for financial institutions to securitise corporate debt so that their balance sheets are more secure while also providing more liquidity to the corporate debt market.
And so, the House of Representatives Standing Committee on Tax and Revenue will launch an inquiry into whether the tax system and related corporations’ laws, including the Corporations Act, present impediments to the development of the Australian retail corporate bond market, in accordance with the terms of reference.
The Committee is interested in whether unnecessary and counterproductive regulations are stopping the development of an Australian corporate bond market. A few short years ago, this was the case with Australian government bonds, but changes to the law undid this. Could the same be achieved for Australian businesses and investors?
In the shadow of the Great Recession a new debate about the level of regulation and compliance in the financial sector across the world was begun. What it has resulted in is an avalanche of new regulations, some of which have had perverse and unintended consequences. The 2020s should be about not whether we need more or less regulation, but rather how we can make our regulations smarter.
The inquiry will examine whether the law in this area is creating a market failure that is making it harder to run and grow a business in and from Australia. We should not rely on work arounds, but promote debt markets that are deep, liquid and competitive. And if our laws and regulations are getting in the way of that, we should look at changing them to the regulations of those countries where most of Australia’s business are going to seek debt finance.
Jason Falinski MP is the Chair of the House of Representatives Standing Committee on Tax and Revenue.